Is This It? Or Can They Fool Us Again?

A stressful weekend for the world's bankers and politicians, followed by a
sleepless Monday, and all with a single question rattling around in their heads:
How can we fool them again?

For decades now the financial/public sector complex has been able to clean
up its recurring messes -- from Long Term Capital Management to the Asian Contagion
to the tech crash to the housing bust -- with credit. Just lower interest rates,
shovel capital into the banks, and watch the hedge funds and CNBC eat it up.
This has worked so well for so long that most of the people now running things
seem to believe that it's right, that easy money actually improves lives
and greases the wheels of capitalism.

History will show, of course, that an unfettered printing press is actually
economic heroin, inducing happy dreams at first but requiring ever higher doses
until it finally kills its victim. Over the past three decades, the doses of
debt have grown to near-fatal levels, leaving only the question of timing:
when do we realize that not only have we been conned but that the con is over,
and abandon, perhaps violently, the existing system?

Today could easily be that day. Interest rates are as low as they can go,
debt is surreally high, and life is still getting worse. Government and the
big banks seem to fallen back on platitudes and finger pointing. Just today
the president proclaimed that "The United States of America is now and always
will be a triple-A credit!"

On the other hand, they've fooled us so many times, and so brazenly, that
the possibility of one more for the road can't be discounted. Here's how the
strategy is evolving:

Federal Reserve policy-makers are likely to try for language assuaging financial
markets Tuesday, but probably are not ready to embark upon a third round
of quantitative easing, economists and market analysts say.

This is because fears of possible deflation are smaller than when the Fed
last embarked upon quantitative easing, plus 10-year Treasury yields are
already low.

The Federal Reserve has already embarked upon two rounds of quantitative
easing, which is buying of long-term Treasury securities in an effort to
push down market-set interest rates. "I don't think the Fed is going to do
anything dramatic, i.e., QE3," said Greg Michalowski, chief currency analyst
with FXDD.

"We've already had QE1 and QE2, and here we are today," he said in reference
to continued economic problems. "Participants who are looking for an actual
QE3 announcement could be disappointed because the Fed has stated on a number
of occasions now that it's a really high bar in terms of implementing a QE3
program."

Still, economists and analysts look for the Fed to acknowledge economic
headwinds and craft some kind of communiqué that lets markets know
the Fed is ready to help as necessary.

"There might be some type of change in the language that drives home the
point they are committed to keeping interest rates very low for a significant
period of time," O'Hare said.

"One thing they might do is be a little more explicit in what they mean
by extended period," said Mike Moran, chief economist with Daiwa Capital
Markets America. "For example, instead of just saying we intend to remain
accommodative for an extended period, they might say we will remain accommodative
until well into 2012, or something along those lines."

Likewise, it's possible the Fed may provide a more definite timeline on
how long it will keep its balance sheet at elevated levels, said Robert Lynch,
currency strategist with HSBC. "They are reinvesting interest in maturing
debt, but they haven't said how long they are going to continue to do that."

Still another possibility, Moran said, is the Fed might opt to increase
the length of the securities in its portfolio.

"They would not enlarge it by doing additional quantitative easing, but
to try to lengthen its maturities, so that as securities mature, they would
roll them into something longer term than what they had originally held and
gradually increase the average maturity," Moran said.

This might put some upward pressure on short-term yields, Moran said. "But
long-term rates probably have more of an effect on the economy, therefore
it would be a mild form of support for economic activity."

The above is mostly speculation, of course, but it does seem reasonable that
among the things we'll be offered at Tuesday's Fed meeting will be a promise
of low interest rates pretty much forever, increased buying of long-term bonds
to lower interest rates even further, and a statement of willingness to flood
the banks with cash again if the bonus pool shrinks, er, if the economy keeps
slowing.

None of these, of course, will make the junkie stop shaking. So the next dose
-- a towering QE3 -- will come soon. But will it "work" again, buying the banks
another year to drain the last few drops of wealth from the system? Or will
the markets finally see through the monetary illusion and pour every last bit
of free capital into hard assets and out of the US?

John Rubino edits DollarCollapse.com and has authored or co-authored five
books, including The Money Bubble: What To Do Before It Pops, Clean
Money: Picking Winners in the Green Tech Boom, The Collapse of the Dollar
and How to Profit From It, and How to Profit from the Coming Real Estate
Bust. After earning a Finance MBA from New York University, he spent the
1980s on Wall Street, as a currency trader, equity analyst and junk bond analyst.
During the 1990s he was a featured columnist with TheStreet.com and a frequent
contributor to Individual Investor, Online Investor, and Consumers Digest,
among many other publications. He now writes for CFA Magazine.